Interest-Only Payments Leave Debt on the Books



The more you earn, the more financing and investment options are available to you – provided you’ve a solid credit rating backing your income. With resources available for payback and a history of making good on debts, you are well-positioned for loan approval and mortgage refinancing. On the other hand, if you live from paycheck to paycheck, eking out each month’s obligations by a sliver, creditors may find you a risky proposition. Unfortunately, a trend gripping consumers relates to tougher lending laws and home financing. You see, for many paying on outstanding debt balances, interest-only payments are becoming the norm. And without opportunities to refinance the debt to more manageable terms, Britons are finding difficulty getting ahead.

Not surprisingly, good money management addresses the most pressing financial concerns, in order of importance. Fixed obligations, like mortgages and instalment loans are customarily paid first, to cover housing, car payments and other recurring responsibilities. Ideally, discretionary spending follows, giving household money managers control over non-essential bills. All too often, however, debtors ride a cycle of repayment, which meets minimum obligations, but fails to wipe away debt. And while this has always been a common condition among credit card users, today’s interest-only crisis carries-over to the mortgage industry, as well.

Debtors Face Industry Shifts and Economic Uncertainty

Employment and credit conditions have improved since the major downturn, but changes within lending markets are responsible for new concerns. Though they are making payments and staving-off cash flow disruptions, many borrowers are not making headway reducing their outstanding debt balances. Even when the debts are not actively rising, slow payback leaves consumers vulnerable to financial difficulties. The condition is worrisome to many observers, because another economic slowdown could again leave many debtors in arears.

Ironically, some of the corrections made to hedge against another market collapse are the very same factors now putting UK debtors at risk. Tougher lending rules, for example, make it difficult for many applicants to refinance home mortgages. As a result, they are locked-in to a cycle permitting them to pay only the minimum remittance during each billing period.

Not only does an interest-only repayment habit slow payback, but it can be misleading to consumers, who are lured to a false sense of security. In reality, it isn’t repayment at all, when principle remains unchanged. Even as they stay in good graces with creditors, their balances stay unmoved by interest-only payments. The hidden peril shows itself when conditions change. An employment problem or unexpected expense, for example, can be jarring when scant room’s available to absorb a cash flow slowdown. Interest-only payments make the problem worse, leaving no cushion to absorb financial difficulties.

Options Limited for Some Mortgage Holders

Home mortgages represent the most substantial debts carried by typical consumers. A natural part of personal finance, mortgages can become burdensome, when balances are not paid down. Despite the importance of mortgages to families’ financial health, the number of interest-only payers will cross into the hundreds-of-thousands this year, as loans reach the end of their terms.

Qualified applicants have refinancing options, which can actually lead to lower payments and faster payoff. But credit-challenged mortgage holders are often saddled with unfavorable financing – simply because their creditworthiness doesn’t rise to the new lending standards. Even as interest rates linger near historic loans, for example, bankers are reluctant to extend loans to older borrowers, who have less time to make good on repayment.

Minimum Payments grow Revolving Debt

Credit card users and others carrying revolving debt are well-advised to pay ahead on balances. Each billing cycle, your card company may submit a minimum payment amount, which satisfies your obligation for the term. Unfortunately, sticking to this interest only or minimum payment schedule does not adequately address the principle balance on your account. And since revolving balances grow independent of what’s owed each month (through additional purchases), paying minimums quickly adds to your total debt load. What’s more, the interest added during each billing cycle is compounded, again and again, until you’ve wiped the entire balance.

Interest-only payments are an understandable short-term approach, helping you find firm financial ground. Over the long term, however, minimum payments only help balances grow, rather than reducing your debt. If you are spinning your wheels paying-off credit card balances or facing mortgage difficulties, meatier payments are the best way to right the ship. In a pinch, family members may be able to co-sign or help with a loan, enabling you to renegotiate mortgage payments. Until they are once again manageable, revolving credit balances must be checked, using restrained spending and repayment discipline.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

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